Union Government decided on 1 million Cap on External Commercial Borrowing for Aviation Sector

The Union government on 19 April 2012 permitted companies engaged in the aviation sector to raise working capital resources through the external commercial borrowings (ECBs) route to the tune of $1 billion. The limit for individual airline companies was set at $300 million. This limit can be availed themselves of either in a lump sum or in tranches, depending on the utilisation of the limit during the one year when the facility is available. So far airlines were allowed to raise foreign capital only for import of capital equipment such as aircraft.

The policy decision in this respect will provide an additional source of low-cost capital to the airline industry and help them tide over its present financial crunch.

Proposals submitted by individual companies would be considered by the RBI under the approval route based on the parameters such as cash flows and the capacity of individual companies to repay these loans from their foreign exchange earnings.

To increase access to ECBs, the RBI is likely to relax the average maturity period for ECBs above $20 million from five to three years. The RBI is also expected to notify within a week guidelines for the proposal, which was part of the budget 2012-13.

ECBs, a financial instrument used by the government to facilitate the access to foreign funds by Indian corporations and public sector undertakings totalled $35.90 billion in 2011-12. They are easier and more attractive way to raise the loan than domestic borrowings.

The government also allowed the airlines to directly import jet fuel as actual end users thereby enabling them to escape the state value added tax (VAT), which ranges from three to 33 percent.

According to a survey, a working group was constituted to address issues concerning the viability of the civil aviation sector. The working group had made several recommendations like rationalisation of VAT (value added tax) on ATF by state governments, allowing foreign airlines to invest in domestic carriers etc.

India's financially troubled civil aviation sector grew at 18.5 per cent in the last seven years.